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Why has shipping got it so wrong?

Why has shipping got it so wrong?

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The arrival of spring brought fresh bloom on the trees and flowers on the plants but there is no spring in the step of the shipping industry as it moves into another slow summer, argues Paul Slater.

The recent spring gatherings in New York and Stamford CT produced the false view that the dry cargo markets were booming when in fact they were barely breaking even.

All of this while shipping continues to carry more than 90% of physical world trade and will do so for the foreseeable future.

Shipping is the world’s largest service industry with hundreds of shipowners competing on a global basis to be paid to transport billions of dollars’ worth of cargoes across the oceans and waterways around the world.

The huge rise in demand for shipping services in the last decade, led by the Chinese industrial boom commencing in 2004, caused a significant surge in freight rates for dry bulk and containerised cargoes. This attracted a large number of new owners and investors from the various private equity and hedge funds in the US and Europe.

It is clear that the objectives of many investors in the publicly quoted companies were to chase short-term gains in ship values while cutting costs in all directions. However, most of the funds that have invested in the last 10 years have shown little or no return except for some day trading on shipping rumours.

The investment surge focused on building new ships to meet the perceived increased demand, with a view that the ship values would increase enabling them to be sold for a profit as soon as they were delivered.

This philosophy ignored the fact that ship values are driven by the revenues earned from carrying cargoes, the quality of the ship management and the capacity of the shipyards to build new ships, and deliver them in a short timeframe.

The Chinese boom lasted less than five years but the new ship orders continued to deliver into the second decade and resulted in a 50% growth in the capacity of the world fleets of dry bulk and container ships. The tanker fleets were also overbuilt as investors switched their attention away from the loss-making dry markets and also climbed into the OSV markets.

The result is a grossly overtonnaged industry with depressed freight rates and reduced ship values. Many quoted companies face insolvency as the unavoidable costs of classification surveys loom and the balance sheet values of the ships are overstated.

Many of the new investors rely on statistical projections of ship values rather than a factual analysis of the freight markets and ignore the fact that charterers will not fix long-term charters with owners that are likely to sell the ships at any time.

Funds have rarely done well when investing in service industries that use expensive assets that are high maintenance and inherently depreciating.

Most of these facts are known to traditional shipowners who have faced similar excesses in the past 30 years, but none of such a serious size.

These owners, who value close relationships with cargo owners, form the hard core of shipping that focuses on operating their ships efficiently on period charters that generate modest profits after bank financing and depreciation but provide a longterm revenue stream.

A well maintained ship properly managed can earn as much as a new ship as there has been little change in the ship’s fundamental technology. The ships must be properly certified and the costs of these statutory surveys must be budgeted for.

New regulations covering air pollution and ballast water treatment will slowly be introduced but are costly.

Given the substantially private nature of ship ownership it is not surprising that the majority of charter fixtures go unreported and the so-called indices, such as the BDI are a worthless gauge of market activity. Only the publicly quoted companies publish some details of charters and the prices of ships bought or sold,

The result of the short-term approach to ship values is that a majority of ships now trade in the spot markets, do not achieve even 300 days annually of paid activity and have to pay for their own fuel.

Recently we have seen a surge in newbuilding orders in both wet and dry bulk and more surprisingly in large container ships. By funding the construction of large numbers of ships of all types without securing their employment is a huge mistake as we have already seen.

The enormous losses in the German equity and debt markets will be repeated elsewhere and probably in the Chinese and Korean Exim banks as they work to support their shipbuilders.

The outlook for crude oil demand is stable with no growth in production and low prices. But the introduction of new fleets of Iranian and Saudi VLCCs and the decline of US imports suggest a weak future for ships not fixed on period charters.

The container markets are grossly overtonnaged and mostly a one-way traffic with few backhaul cargoes and the new US policy on trade agreements will likely reduce US imports.

Overall we can expect shipping to return to making marginal profits from the services it provides and the operational longevity it can obtain from using well maintained and well managed ships.

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7 Comments

  1. Captain C. Allport FNI
    June 15, 2017 at 10:54 am

    Another thoughtful and common-sense article from Paul Slater. I doubt whether anyone will listen as they are all chasing short-term gains? They are like lemmings, they never learn as it happens every decade. The prudent ones don’t need to as they have always taken the smart view, fixed their newbuildins on T/C’s and had patience for longer term benefits. They are the ones who will survive!

  2. Martin Bennell
    June 15, 2017 at 8:30 pm

    Very interesting article. We are certainly living in interesting times. Overtonnage, stable but low oil prices, new (& costly) regulations, surge in new building and reduction in US imports….and this is all before we even discuss Brexit, government uncertainty, cyber security onboard etc etc……

  3. Dagfinn Lunde
    June 15, 2017 at 9:08 pm

    For once I agree with Paul!! Good article, however, I will only say: What else is new?? We have now seen the same since I joined shipping in 1976!! One or two good year and then 7-10 bad……and most people are not getting any payback on the ships in the low periods unless they have some older ships in their fleet. I hear yesterday at the TradeWinds conference in Athens that most profits on ships are made after the ship has passed 10 years of age! I am not sure if that still is true if they continue to scrap ships of 7-10 years age!!

  4. Capt manjit handa
    June 15, 2017 at 9:32 pm

    There is a single word that describes the situation, GREED. The same greed that caused the US housing market collapse of 2008 which reverberated into the rest of the world. Margaret Thatcher put it very succinctly,” It is easy to spend other people’s money till you run out of it”. That is what bankers do, invest vast sums of investors money in dubious schemes and instruments. The current shipping glut would not have been possible without banks lending huge amounts of money to shipowners, all based upon optimistic projections by intelligent, articulate and well-paid bankers. In the near future, there will be some more bankruptcies in the shipping world. Rickmers is the latest to go under.

  5. Andrew Craig-Bennett
    June 15, 2017 at 11:47 pm

    Very good article.

    Three points:

    1. There is a LOT of “naive capital” involved in ordering new ships. I include in this description BOTH the private equity funds and certain national governments. These people don’t know the rules, have silly expectations, and don’t care.

    2. People don’t pay nearly enough attention to the reduction in man hours per ship in modern shipbuilding.

    3. Don’t build a commodity ship; if you really don’t have any better ideas about shipping, buy a secondhand one.

  6. Javier Méndez
    June 16, 2017 at 10:20 am

    Great article.
    Someone once said: “we must learn to sail high wins and free ourselves of the hope the sea will ever rest.”
    To invest in shipping (capital intensive assets, high devaluation and more than probable damage/loss risks), one must be either a sensible experienced professional or simply mad.
    Who spends so easily other people money without a shred of industry knowledge, solely focusing on short and expecting to be right?!
    Probably one who doesn’t even know who said that…

  7. NILESH J SOMPURA
    June 17, 2017 at 4:16 am

    Would like to make one line statement : Situation is awakening us to Renovate N Innovate from grass root level in CONCEPT, DESIGN & REGULATE (Regulatory Authority,Policy-Makers etc).